American Express Falls On Barclays Downgrade

By Teresa Rivas

American Express (AXP) was falling 2.7% in recent trading, following a downgrade from Barclays.

Analyst Mark DeVries has a note out today handicapping American Express and Discover Financial Services (DFS),but while he thinks that the latter has room to run, he lowered his rating on American Express from Overweight to Equal Weight on valuation concerns.

Both American Express and Discover have had impressive runs since the market bottom in 2009, rising 656% and 912%, respectively, while the S&P 500 rose 144%, DeVries writes. Yet he notes that most of the stocks’ rallies this year have come from multiple expansion (rather than a combination of multiple and EPS growth) and he sees AXP’s valuation as “appropriate” with potential near-term downside if revenue remains soft.

“The stock is now trading at the low end of its historical average of 16x-18x. Post financial crisis, AXP has redirected growth initiatives to higher multiple businesses, but has also become a more capital-intensive, lower ROE business that is also more mature with slightly diminished growth prospects, so we don’t expect the multiple will return to the high end of that range. Moreover, with revenue growth below long-term expectations and still slowing, the multiple could drift lower near term.”

By contrast, he sees potential for expansion it Discover’s valuation:“ DFS’s more lend-centric model should keep its multiple below AXP’s, but their model has actually not resulted in meaningfully higher earnings volatility than AXP’s, while delivering fairly comparable ROEs and growth, so we believe DFS’s multiple should trade somewhere between AXP’s 16x and the 10x-11x multiple Capital One Financial (COF) traded at following its high growth period.”

American Express has risen nearly 34% in the past year, compared to 48.5% for Discover and 22% for the S&P 500.

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